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2. Trading the News

Summary: Trading the News

When trading the news, you can either have a directional bias or a non-directional bias.

Here are some other things to keep in mind when news trading:

  • When you have a directional bias, you are expecting price to move a certain direction, and you’ve got your orders in already.
  • It is always good to understand the underlying reasons why the market moves in a certain direction when news is released.
  • When you have a non-directional bias, you don’t care which way price heads. You just want to get triggered.
  • Setups for the non-directional bias are also called straddle trades.

That’s pretty much it…

Is it really that easy???

HECK NO!!!

You’ll have to practice and trade many different reports before you get a feel for:

  • Which news reports will make the market move
  • How much of a surprise is needed for the market to move
  • Which reports to avoid trading.

Like in any other trading method, your success depends on your preparation.

This will take time and practice. Do your homework and study the economic indicators to understand why they are important.

Remember, nothing worth having comes easy, so stick with it and you’ll find that trading the news will be very rewarding once you get the hang of it!

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2. Trading the News

How to Trade the News Using the Straddle Trade Strategy

What if there was a way to make money quickly even if you had no idea whether the market would move up or down?

It’s possible as long as there is sufficient price volatility.

And when can you get this volatility? When news like economic data or central bank announcements is released!The first thing to consider is which news reports to trade.

Earlier, we discussed the biggest moving news releases.

Ideally, you would want to only trade those reports because there is a high probability the market will make a big move after their release.

The next thing you should do is take a look at the range at least 20 minutes before the actual news release.The high of that range will be your upper breakout point, and the low of that range will be your lower breakout point.

Note that the smaller the range is the more likely it is you will see a big move from the news report.

The breakout points will be your entry levels.

This is where you want to set your orders. Your stops should be placed approximately 20 pips below and above the breakout points, and your initial targets should be about the same as the range of the breakout levels.

Straddle Trade

This is known as a straddle trade.

You are looking to play BOTH sides of the trades.

It doesn’t matter which direction the price moves, the straddle strategy will have you positioned to take advantage of it.

Straddle Trade

Now that you’re prepared to enter the market in either direction, all you have to do is wait for the news to come out.

Sometimes you may get triggered in one direction only to find that you get stopped out because the price quickly reverses in the other direction.

However, your other entry will get triggered and if that trade wins, you should recoup your initial losses and come out with a small profit.

A best-case scenario would be that only one of your trades gets triggered and the price continues to move in your favor so that you don’t incur any losses.

Either way, if done correctly you should still end up positive for the day.One thing that makes a non-directional bias approach attractive is that it eliminates any emotions.

You just want to profit when the move happens.

This allows you to take advantage of more trading opportunities because you will be triggered either way.

As most news events tend to have a limited impact on longer-term price action, setting realistic profit targets should help to increase the number of winning trades.

There are many more strategies for trading the news, but the concepts mentioned in this lesson should always be part of your routine whenever you are working out an approach to taking advantage of news report movements.

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2. Trading the News

How to Trade the News With a Directional Bias

Let’s now see how to trade the news with a directional bias in a trading scenario.

Let’s go back to our example of the U.S. unemployment rate report.

Scenario: If the U.S. Unemployment Report showed improvement, why did USD still weaken?

Earlier, we gave examples of what could happen if the unemployment report came in light with expectations, or slightly better.In this scenario, let’s say the unemployment rate showed a surprising DROP.

Which is a good thing since that means more people now have jobs.

But you look at your charts and the dollar is FALLING!

What?!

Isn’t the dollar supposed to rise if the unemployment rate is dropping?There could be a couple reasons why the dollar could still fall even though there are more people with jobs.

Reason #1: Overall Economic Outlook Still Poor

The first reason could be that the long-term and overall trend of the U.S. economy is still in a downward spiral.

Remember that there are several fundamental factors that play into an economy’s strength or weakness.

Although the unemployment rate dropped, it might not be a big enough catalyst for the big traders to start changing their perception of the dollar.

Reason #2: Positive Employment Numbers Are Temporary

Perhaps it’s right after Thanksgiving during the holiday rush. During this time, many companies normally hire seasonal employees to keep up with the influx of Christmas shoppers.

This increase in jobs may cause a short term drop in the unemployment rate, but it’s not at all indicative of the long-term outlook for the U.S. economy.

A better way to get a more accurate measure of the unemployment situation would be to look at the number from last year and compare it to this year. This would allow you to see if the job market actually improved or not.

The important thing to remember is to always take a step back and look at the overall picture before making any quick decisions.

Now that you have that information in your head, it’s time to see how we can trade the news with a directional bias.

How to Trade the News With a Directional Bias

How to Trade the News With a Directional Bias in Forex

Let’s stick with our unemployment rate example to keep it simple.

The first thing you would want to do before the report comes out is to take a look at the trend of the unemployment rate to see if it has been increasing or decreasing.

By looking at what has been happening in the past, you can prepare yourself for what might happen in the future.Imagine that the unemployment rate has been steadily increasing.

Six months ago it was at 1% and last month it topped out at 3%.

You could now say with some confidence that jobs are decreasing and that there is a good possibility the unemployment rate will continue to rise.

Since you are expecting the unemployment rate to rise, you can now start preparing to go short on the dollar.

This is your directional bias.

Particularly, you feel like you could short USD/JPY.

Just before the unemployment rate is about to be announced, you could look at the price movement of USD/JPY at least 20 minutes prior and find the range of movement.

Take note of the high and low that is made. This will become your breakout points.

The smaller the range, the larger the tendency there is for a volatile move!

Since you have a bearish outlook on the dollar (your directional bias), you would pay particular attention to the lower breakout point of that range.

You are expecting the dollar to drop, so a reasonable strategy would be to set an entry point a few pips below that level.

Trading the news with a downside directional bias

You could then set a stop just at the upper breakout point and set your limit for the same amount of pips as the breakout point range.

Always have a stop and target in mind

One of two things could happen at this point.

  1. If the unemployment rate drops then the dollar could rise. This would cause USD/JPY to rise and your trade would most likely not trigger. No harm no foul!
  2. Or if the news is as you expected and the unemployment rate rises, the dollar could drop (assuming the entire fundamental outlook on the dollar is already bearish).

This is good for you because you already set up a trade that was bearish on the dollar and now all you have to do is watch your trade unfold.

Target should be equal to consolidation range

Later on, you see that your target gets hit. You just grabbed yourself a handful of pips! Booyeah!

The key to having a directional bias is that you must truly understand the concepts behind the news report that you plan to trade.

If you don’t understand what effect it can have on particular currencies, then you might get caught up in some bad setups.

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2. Trading the News

How to Trade Forex on News Releases

Before developing a ‘Trade the News” strategy, we have to look at which news events are even worth trading.

You want to be able to answer, “Which news releases should I trade?

Forex traders should familiarize themselves with the key event risks that heavily impact the major currencies.

Remember that we are trading the news because of its ability to increase volatility in the short-term, so naturally, we would like to only trade news that has the best market-moving potential for the currency market.

The news that tends to drive price action and produce volatility usually involves:

  • Changes in central bank policy (“monetary policy”)
  • Shifts in government policy (“fiscal policy“)
  • Unexpected results in economic data releases
  • Random tweets from a certain world leader who likes to put his name on tall buildings

Being aware of upcoming key event risks can help avoid being on the wrong side of the market.

How to Find Events that Produce Volatility

The  Economic Calendar highlights the important events and economic data that are being released by the countries with the most popularly traded currencies.

Economic Calendar

The number of events scheduled can reach over a hundred on any given week! Trying to sift through so many events can be a pain in the butt.

Luckily for you, our Economic Calendar makes it easy to identify the relative importance of each specific event.

Economic Calendar Filter by Impact

In our Economic Calendar, you have the ability to filter event listings by “Impact“.

For example, by selecting only “HIGH“, the Economic Calendar will only display the events that have historically been known to produce market volatility. 

If you spend some time exploring the Economic Calendar, you’ll start to notice that the most important events usually relate to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and consumer sentiment.

Here are some examples:

  • Interest rate decisions by central banks
  • Inflation (CPI, PCE, PPI)
  • Employment data (unemployment, wage growth)
  • Economic growth (GDP)
  • Retail sales 
  • Industrial production
  • Business sentiment surveys
  • Manufacturing sector surveys
  • Consumer confidence surveys
  • Housing data (sales, construction)
  • Trade balance

Different countries may use different names for similar data but we try to point that out in the Economic Calendar.

Depending on what’s currently happening in the world, the relative importance of this event may change. 

For example, interest rate decisions may be the main focus during a certain time, while during a different time, it will seem like nobody cares.

This is why it’s important to stay informed and know what the market is focusing on at the moment.

Pay Special Attention to News from the U.S.

While the markets react to most economic news from various countries, the biggest movers and most watched news come from the U.S.

News Releases

The United States is still considered the world’s most powerful country,  whether it’s in the domain of military affairs, geopolitics, industry, energy, science, culture, and technology.

It is even described as a “financial superpower.”

Even if its position has been eroded by setbacks, imbalances, and weaknesses, the strength and influence of the US dollar will not be matched anytime soon.

The United States still has the largest economy in the world and the U.S. dollar is the world’s reserve currency.This means that the U.S. dollar is a participant in about 90% of all forex transactions, which makes U.S. news and data important to watch.

With that said, let’s take a look at some of the most volatile news for the U.S.

Most volatile news reports in the forex market

In addition to inflation reports and central bank speeches, you should also pay attention to geopolitical news such as

  • Pandemics
  • Wars
  • Natural disasters
  • Political unrest and protests
  • Upcoming elections

Although these may not have as big an impact as the other news, it’s still worth paying attention to them.

When our economic nerd, Forex Gump, is in a good mood, he usually releases an article on upcoming news reports that you can play and with trade strategies to boot!

Also, keep an eye on moves in the stock market. Especially the U.S. stock market.

There are times where sentiment in the equity markets will be the precursor to major moves in the currency market.

Now that we know which news events make the most moves, our next step is to determine which currency pairs are worth trading.

How to Choose Currency Pairs to Trade the News

After identifying the event to monitor, you now want to trade the currency associated with that event’s economy.

Choosing the appropriate currency pair is an important decision when “Trading the News”.

As a news trader, you are trying to achieve two things:

  1. Take advantage of the short-term spike in volatility…
  2. While keeping your transaction costs as low as possible

Because news can bring increased volatility in the forex market (and more trading opportunities), it is important that we trade currencies that are deeply liquid.

Currencies with deep liquidity have the tightest spreads which is what allows you to keep your transaction costs low.

Liquid currency pairs give us a reassurance that our orders will be executed smoothly and without any “hiccups”.

  1. EUR/USD
  2. GBP/USD
  3. USD/JPY
  4. USD/CHF
  5. USD/CAD
  6. AUD/USD

Did you notice anything here?

That’s right! These are all major currency pairs!Remember, because they have the most liquidity, majors pairs usually have the tightest spreads.

Since spreads widen when news reports come out, it makes sense to stick with those pairs that have the tightest spreads, to begin with.

Now that we know which news events and currency pairs to trade, let’s take a look at some approaches to trading the news.

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2. Trading the News

Beginner’s Guide to Forex News Trading

As forex traders, it’s important to pay attention to major economic data releases, speeches from government officials, and geopolitical events.

Why?

Because this information usually reflects the strength of a given economy and may indicate the future direction of a given currency.

Trading the news is often difficult and not be suitable for everyone, but the volatility that follows can create lots of trading opportunities.

Why trade the news?

The simple answer to that question is “To make more money!”

But in all seriousness, as we learned in the previous lesson, the news is a very important part of the forex market because news has the potential to make the market move!

When news comes out, especially important news that everyone is watching, you can almost expect to see some major movement.

The fact that you know the market will most likely move somewhere makes it an opportunity definitely worth looking at.

Your goal then, as a news trader, is to get on the correct side of the move.

The Dangers of Trading the News

As with any trading strategy, there are always possible dangers that you should be aware of.

Here are some of those dangers:

Spreads Widen

Because the forex market is very volatile during important news events, many forex brokers WIDEN the spread during these times.

This increases trading costs and could hurt your bottom line.

You could also get “locked out” which means that your trade could be executed at the right time but may not show up in your trading platform for a few minutes.This is bad for you because you won’t be able to make any adjustments if the trade moves against you!

Imagine thinking you didn’t get triggered, so you try to enter at the market price… only to realize that your original order got triggered!

News Trader Crying

You’d be risking TWICE as much now!

Price Slippage

You could also experience SLIPPAGE.

Slippage occurs when you wish to enter the market at a certain price, but due to the extreme volatility during these events, you actually get filled at a far DIFFERENT price.

Slippage

Big market moves made by news events often don’t move in one direction.

Often times the market may start off flying in one direction, only to be whipsawed back in the other direction.Trying to find the right direction can sometimes be a headache!

Profitable as it may be, trading the news isn’t as easy as beating some toddler at Fornite. It will take tons of practice, practice and you guessed it… more practice!

Most importantly, you must ALWAYS have a plan in place.

In the following lessons, we’ll give you some tips on how to safely trade the news.

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2. Trading the News

News Makes the Forex Market Move

It’s not enough to only know technical analysis when you trade. It’s just as important to know what makes the forex market move.

Just like in the great Star Wars world, behind the trend lines, double tops, and head and shoulder patterns, there is a fundamental force behind these movements.

This force is called the news!

To understand the importance of the news, imagine this scenario (purely fictional of course!)

Let’s say, on your nightly news, there is a report that the biggest software company just filed bankruptcy.

You own shares of this company.

What’s the first thing you would do? How would your perception of this company change?

How do you think other people’s perceptions of this company would change?The obvious reaction would be that you would immediately sell off your shares.

In fact, this is probably what just about everyone else who had any stake in that company would do.

The fact is that news affects the way we perceive and act on our trading decisions. It’s no different when it comes to trading currencies.

There is, however, a distinct difference with how news is handled in the stock market and the forex market.Let’s go back to our example above and imagine that you heard that same report of the big software company filing bankruptcy, but let’s say you heard the report a day before it was actually announced in the news.

Forex News Trading

Naturally, you would sell off all your shares, and as a result of you hearing the news a day earlier, you would make (save) more money than everyone else who heard it on their nightly news.

Sounds good for you right? Unfortunately, this little trick is called INSIDER TRADING, and it would have you thrown in jail.

Martha Stewart did it and now she has a nice mug-shot to go along with her magazine covers.

In the stock market, when you hear news before everyone else it is illegal. In the forex market, it’s called FAIR GAME!

The earlier you hear or see the news, the better it is for your trading, and there is absolutely no penalty for it!

Add on some technology and the power of instant communication, and what you have is the latest and greatest (or not so greatest) news at the tip of your fingers.This is great… Uhmmm… “news” for retail traders because it allows U.S. to react fairly quickly to the market’s speculations.

Big traders, small traders, husky traders, or skinny traders all have to depend on the same news to make the market move because if there wasn’t any news, the market would hardly move at all!

The news is important to the forex market because it’s the news that makes it move.

Regardless of the technicals, news is the fuel that keeps the forex market going!